What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence

Laura Bottazzi (), Marco Da Rin () and Thomas Hellmann ()

No 2008-30, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: We develop a theory and empirical test of how the legal system affects the relationship between venture capitalists and entrepreneurs. The theory uses a double moral hazard framework to show how optimal contracts and investor actions depend on the quality of the legal system. The empirical evidence is based on a sample of European venture capital deals. The main results are that with better legal protection, investors give more non-contractible support and demand more downside protection. These predictions are supported by the empirical analysis. Using a new empirical approach of comparing two sets of fixed-effect regressions, we also find that the investor?s legal system is more important than that of the company in determining investor behavior.

JEL-codes: G20 G30 G24 K22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-ent and nep-reg
Date: 2008
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Related works:
Working Paper: What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence (2007)
Working Paper: What is the Role of Legal Systems in Financial Intermediation? Theory and Evidence (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:kubcen:200830

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